FDI in multi brand retail: As Amazon, Flipkart play in India, time to end e-tail hypocrisy

Given how the government frowns on FDI in multi-brand retail, its policy on allowing this in e-tail has always been hypocritical. After all, while 100% FDI is only allowed in B2B e-commerce, it is well known that Amazon and Flipkart are big players in the B2C space, and the way they have got around the restriction is through creative interpretation of the rules and using the ‘marketplace’ model—ironically, the government’s affidavit in the Delhi High Court earlier this year spoke of how the FDI policy did not recognise the term ‘marketplace’!

With the Amazons and the Flipkarts offering huge discounts—funded by their access to free foreign funds from private equity investors—to entice customers away from brick-and-mortar firms and traditional retailers up in arms, the government came up with a ‘solution’ last March. The department of industrial policy and promotion (DIPP) said FDI in B2C e-commerce was fine provided not more than 25% of the sales made on the marketplace came from a single vendor and, more important, the marketplace must not ‘directly or indirectly influence the sale price of goods and services’—once an Amazon didn’t fund the discounts, the argument went, there would be a level playing field between those who sold through e-tailers and those who went the conventional brick-and-mortar route.

Having come up with a policy, how do you ensure, for instance, that the big suppliers on Amazon and Flipkart like Cloudtail and WS Retail were not just splitting their operations on paper to meet the 25% rule—it is not clear why the rule was even brought in—or that it is not Amazon/Flipkart that are funding the discounts? In an interview to this newspaper on Wednesday, DIPP secretary Ramesh Abhishek has said that DIPP’s job was to formulate and notify policies and any complaint had to be filed with either RBI or the Enforcement Directorate under FEMA. Imagine putting in place a policy which the government is not even monitoring 24×7.

In an attempt to fix this, the government has now constituted a 12-member panel under NITI Aayog CEO Amitabh Kant with an avowed attempt to remove the complicated—and abuse-prone—regulations. Apart from various secretaries from ministries such as finance, there are also going to be six representatives of state governments—the report is to be submitted to the PMO and not the line ministry.

Ideally, the panel should scrap the restrictions since there are no two views that e-tail gives SMEs unparalleled access to markets, the back-end facilities being set up are truly world-class and help in increasing warehousing/logistics efficiencies, a lot of employment is being created and, to the extent consumers get great discounts, this is very consumer-friendly as well—the fact that e-tail is one of the biggest FDI sectors is also something to keep in mind.

No matter how the panel finesses its arguments, however, allowing FDI access to the B2C segment via e-tailing but not via brick-and-mortar makes it fundamentally unfair. More important, a Walmart does not threaten a kirana store since it requires the kind of land most cities do not have in their inner areas but an Amazon or a Flipkart directly threaten them—that is, not allowing FDI in brick-and-mortar only protects large Indian retailers even though it is being packaged as a pro-kirana move.